Hewlett, PwC Near Backdating Settlement

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Mercury Interactive Corp. shareholders have reached a tentative agreement with the company, its auditor PricewaterhouseCoopers, and its former executives for a $117.5 million settlement to end their class-action lawsuit alleging the backdating of stock-option grants, according to law firm Labaton Sucharow LLP.

The law firm represents the Mercury Pension Fund Group, one of the plaintiffs in the case, which began more than two years ago. The impending settlement is subject to court approval and hasn’t been formally filed.

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Mercury — which was acquired by Hewlett Packard last year — was one of the first of more than 150 companies implicated in the backdating scandal. It has since settled with the Securities and Exchange Commission for $28 million on charges of backdating option grants, issuing compensation that wasn’t expensed, falsifying documents, and submitting fraudulent disclosures. As part of the settlement, Mercury neither admitted nor denied the allegations.

The SEC has also charged four of the software maker’s former executives with what it considered a “fraudulent and deceptive scheme.” Listed in the SEC’s complaint are former chairman and CEO Amnon Landan, CFOs Sharlene Abrams and Douglas Smith, and general counsel Susan Skaer.

In their complaint against Mercury, shareholders of the company named those executives, along with three directors and auditor PricewaterhouseCoopers as defendants. They accused Mercury of lacking effective internal controls, filing false and misleading financials, and allowing the misdating of stock option grants to occur 54 times.

PwC is accused of knowing about Mercury’s “ineffective” controls and knew that misleading information was being shared with investors but did nothing about it. Attorneys for the individuals named and the outside counsel for PwC could not be reached by Monday presstime.

For its part, HP acknowledged to CFO.com that a memorandum of understanding to resolve the consolidated lawsuits had been agreed upon on Monday between Mercury and the plaintiffs. But a company spokeswoman declined to elaborate further.

Shareholder lawsuits followed Mercury’s announcement in November 2005 that Landan, Smith, and Skaer had abruptly resigned following an internal probe into a decade’s worth of manipulation of the company’s stock-option-granting process. The suits have since been consolidated with the U.S. District Court in the Northern District of California.

Following Mercury’s news, the company’s stock dropped from $35 per share to $25.66, the shareholders’ suit notes. They believe the securities they bought from Mercury had been artificially inflated because of the backdating activities and were later harmed financially when the stock price fell.

Labaton claimed on Monday that the $117.5 million settlement was the largest reached in any backdating case to date.

There have, however, been few lawsuits that have reached such a resolution. Lawrence Kolker, an attorney not involved in the Mercury class-action suit, told CFO.com that this case is unlike most of the backdating cases. Most have been derivative suits, which are actions — usually against directors — filed on behalf of the company. “Only a few of the stock options cases are class actions, so there are limited points of comparison,” said Kolker, a partner Wolf Haldenstein Adler Freeman & Herz.